Thank you for your feedback! Maybe there was some fix in the new ati- driver, or a simple recompile against the new X fixed it. Either way, marking this as fixed.
** Changed in: xorg-server (Ubuntu)
Status: Confirmed => Fix Released
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mergedfb doesn't work with xserver-xorg-core 2:1.2.0-3ubuntu1 (or newer)
https://launchpad.net/bugs/88741
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